You need to consider the affordability of your rentals to cover your operating costs and to price your units according to your competition and what the local market will bear.
Your ongoing goal will be to build reserves while avoiding pay outs to support the business itself.
An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.
Part Three in a 5-Part Series: Is An Investment in Real Estate Right for You?
Part One: FOMO
Part Two: Real Estate Investment Types
Is there a simple way to evaluate which properties merit your investment?
Look at absorption vs. overhang.
Absorption describes the demand for units — not enough units in a specific location to satisfy demand usually measured by vacancy rates — low is better.
Overhang refers to renter turnover.
More renters leave than the number of potential tenants signing up.
Simply, supply outstrips demand.
Several factors favor higher absorption demand.
Location, location, location, right?
Yes, renters prefer closeness to both transportation and to shopping areas.
How about the amount of income you can generate?
You need to consider the affordability of your rentals to cover your operating costs and to price your units according to your competition and what the local market will bear.
A major factor is the condition of your property.
- Everything from how old is your wiring — will it need to be upgraded to increase your units attractiveness.
- Same for plumbing.
- Size of units — bigger is better in certain areas — so spaciousness and cleanliness command higher rents.
And, finally consider the value trends in the property’s neighborhood.
- How stable is the community?
- Is it free from crime?
From your potential list of properties fitting your investment criteria you’ll want to check off those that fit the lowest price you can negotiate.
- To do so you need to know your cost and income per square foot for the property type and community.
- The experts recommend opening your negotiations by asking for 10% lower than the property’s asking price.
- They also suggest agreeing to the longest mortgage terms to lower monthly payments.
- And finding the lowest interest rates you can.
In the right market, you might even consider taking a balloon payment when you can after three to 10 years.
Remember, if the real estate market tanks, you’ll need to come up with the payment if you can’t renegotiate it.
Shoot for a 30% positive cash flow so you can pay your monthly mortgage and bank the profit.
Negotiate a lower gross multiplier figure.
Typically in the middle of the last decade it ranged between 3x to 12x annual rental price.
In other words if the property’s annual rental income totals $25,000 at 3x the purchase price equals $75,000.
The bonus, of course, is you can borrow against 100% to close the sale.
Likewise a gross multiplier at 12 times yields a $300,000 price.
Then, as the new owner going forward you want to reach the point where your property is self-supporting and pays for itself.
You’ll want to reduce costs at the front end and during operations while you begin to raise rents.
Your ongoing goal will be to build reserves while avoiding pay outs to support the business itself.
Steps:
(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.
(34) On your visits look for any newer developments that may trigger changes in neighborhood patterns. New construction in or around the neighborhood? Major regional economic adjustments? Transition from households with children to ones that are empty nests? Rezoning, and dramatically rising/falling land values?